Playing to win: your game plan to financial success
Kelley J.P. Lindberg
Americans know what good money management is. They understand how to shop for mortgages, know they should have wills, see the importance of keeping an emergency cash fund, and agree that retirement accounts are very valuable. They just don’t do it.
A recent survey conducted for Bankrate.com by RoperASW revealed that while many people understand financial concepts, only 40 percent, for example, keep an emergency cash fund. While 59 percent of people surveyed feel they are in control of their finances, the same number don’t know how much insurance they should have. And 93 percent of the respondents agreed that paying bills on time was “very important,” yet only 80 percent manage to do it.
“Most people spend more time planning their vacations than they do planning their financial future,” says Greg B. Wood, senior vice president and regional manager for Wells ‘Fargo Private Client. Services.
Maybe you’re ahead of the game. Perhaps you’ve already met with a financial advisor, and you’ve got a plan filed away in your desk drawer. Did you implement everything on the plan? When was the last time you reviewed it?
If talk of managing investments, insurance, retirement plans, assets, taxes and budgets makes your eyes start to glaze over, take heart. The two keys to keeping your sanity when dealing with money issues are to take it one step at a time and to find a team of professionals to do the heavy lifting for you.
Building the team
No one is kidding you — the financial industry is complex and constantly changing. Keeping up with all the possible investment vehicles insurance options, retirement plans and laws is more than a full-time job — and you already have at least one full-time job. Therefore, wealth management is probably one area where you may do better to hire professionals to work with you. A small investment in an expert’s time can reap much larger rewards down the road — and leave you more time to concentrate on your business, family or other priorities.
Your financial planning team will likely consist of several different professionals. A single person can’t do it all, partly because the industry is so complex, and partly because laws regulate what each type of financial professional may do. However many professionals build a network of trusted colleagues around them, so if you need a tax attorney, for example, your financial advisor probably can recommend someone they’ve worked with. Some firms employ or are affiliated with people in the various disciplines, to give you that one-stop shopping experience.
The Game Plan
Like most long-term projects, building and managing your wealth involves several steps, all of which your financial team can help you navigate:
1. Take stock of your current financial status.
2. Set goals for future expenses, needs and dreams.
3. Develop a plan – specific tools and actions needed to meet those goals.
4. Implement the plan. A plan isn’t useful unless you actually DO what’s on the plan.
5. Review and revise the plan annually. Goals change, opportunities arise, problems creep up.
Whether you’re just beginning or are updating an existing financial plan, you must first assess where you are now. What do you own, owe, make and spend? And where do you want to go from here?
Your first meeting with a financial advisor is filled with questions from both sides: You try to establish what the advisor can do for you. The advisor tries to determine your current situation and your goals. “The toughest part of the wealth-planning process is gathering all the information you need,” says Wood. “Bring absolutely as much as possible with you to an initial meeting.” Wood recommends you bring any documents that show your current financial state, such as bank statements, tax returns, and lists of assets and debts. If you own a business, bring the corresponding business documents, too, because your business and your personal finances are closely tied together.
“We talk about their objectives, current concerns, family issues, hopes and dreams, and immediate and longterm goals,” says Wood. He also learns about the client’s current financial advisors, so he can work with them as well. “From there, we start to come up with an analysis of what their wealth plan should be. It’s not our ideas, but a reflection of their wants, desires and needs.”
The plan, as it takes shape, will encompass many different strategies for achieving those goals.
Play #1: Targeting Retirement
One of the first things your financial advisor will look at is your retirement plan, according to Travis Kell, a certified financial planner with American Express Financial Advisors in Midvale. If you are an employee, your advisor can evaluate your company’s plans and make investment recommendations. He or she may suggest additional retirement savings vehicles such as IRAs.
If you own a business, your advisor should look at how retirement plans affect not only your own wealth, but how your business attracts and retains employees. “We start by looking at basic employee benefits to retain key employees,” says Kell. “There are various retirement plans that can be structured from very simple to very complex, such as SIMPLE IRAs, SEP (Simplified Employee Pension) IRAs, Keoghs, 401(k), profit-sharing plans, or defined benefit plans. On the nontraditional front, you may have an ESOP (Employee Stock Ownership Plan) or nonqualified deferred compensation plan.”
While all retirement plans allow pretax contributions, each plan varies based on the company’s size and level of administration. Each plan has different limitations or benefits for owners and highly compensated employees. Therefore, says Kell, “It’s important to determine the goals and objectives of the plan to make sure the right plan is implemented.”
Employees often ask for investment advice regarding their retirement plans. “Legally and ethically,” says Kell, “business owners should not give that advice. More and more, owners are turning to outside advisors to help in allocating retirement plans on an individual basis. If you’re not getting that kind of help on your plan, you should demand it.”
With the right retirement plans in place, business owners know their employees are being attracted, retained and taken care of, while the owners’ fiduciary responsibility is reduced and their own retirement needs are maximized.
Play #2: Managing Risk
“Some risks are insurable. Others are not,” says Chesley H. Erickson, CPA and partner in Huber, Erickson & Bowman, LLC, a Salt Lake City accounting firm that provides an integrated approach to financial planning beyond that of simple bookkeeping. Evaluate the types of risks you face in both your personal life and your business, and determine what you can afford to lose and what you can’t.
When people hear “insurance,” they usually think of health, property and life insurance. But disability could be even more important to you than life insurance. According to the National Safety Council and the National Center for Health Statistics, disability claims are 8.75 times more prevalent than auto accidents and 11 times more prevalent than deaths. National Underwriter reports that 70 percent of all Americans will become disabled and unable to work for 90 days or more at some point in their lives. And the scariest statistic: The U.S. Government’s Housing & Home Finance Agency claims that 48 percent of all mortgage foreclosures are due to a disability. If disability insurance isn’t in your plan, consider adding it.
Other types of insurance you may consider include:
Earthquake and Flood protection–most home insurance policies don’t cover these hazards.
Coverage for valuables–home insurance policies may require additional riders to protect antiques, jewelry, guns, furs, coins, photography equipment, computers, etc.
Long-Term Care insurance–covers nursing home or other long-term healthcare needs. Without it, the patient must exhaust most of his assets before Medicaid pays.
Malpractice insurance–covers professionals who provide services such as lawyers, doctors or architects.
Liability–covers physical or other injuries, and may protect against lawsuits for harassment and other issues. Business continuation–covers losses such as warehouse fires or inventory lost to an earthquake, and keeps the business funded until the lost resources are built back up.
Employee bonding–covers misappropriation of funds by employees who handle money.
Besides insurance policies, says Erickson, the best way to minimize risk is to “have good controls on your business, such as good accounting controls, and an effective collection system. You need good legal representation who keeps you aware of legal issues. And an outside audit or review can provide the owner with assurance that current processes are adequate and can be useful as a check and balance even if it’s not required by law.”
Play #3: Tax and Estate Planning
Estate planning comprises three basic goals: providing for your loved ones, providing for your own needs. if you become incapacitated, and keeping as much of your wealth as possible in your family’s hands and out of the government’s. A will is seldom enough these days.
According to attorney Lawrence R. Barusch, a shareholder in Parsons, Behle & Latimer in Salt Lake City and head of the firm’s tax section, a dizzying array of legal vehicles are available to help you accomplish these goals. “First, we look at whether the estate is above or below $3 million,” he says, because estate taxes begin to figure prominently over the $3 million mark.
Marital deduction trusts, family trusts, irrevocable insurance trusts, revocable trusts (also called living trusts), special needs trusts and family limited partnerships all offer ways to protect your money, avoid taxes, provide for your spouse, children or grandchildren, or benefit a favorite charity. An attorney like Barusch, who specializes in estate and retirement planning, is essential for helping you make informed choices.
Transferring assets can also help defray taxes or protect assets. For example, a Uniform Gift to Minor Account (UGMA) allows you to gift up to $11,000 a year to a child’s account, so that money is taxed at the child’s lower tax rate. Of course, you may lose any right to assets you transfer to a child, so this may not be the best move for some families.
Other legal documents can help your family through difficult times, such as durable and medical powers of attorney (which allow one spouse to manage affairs and medical decisions if the other is incapacitated), living wills (also called medical directives), organ donation permissions and burial instructions.
Play #4: Taking Care of Business
What will happen to your business if you are disabled tomorrow? What will happen to it if you die? What if you want to retire?
The fate of your business has a direct impact on the fate of your family’s financial future. With most privately owned businesses, the objective is to eventually sell it, pass it to heirs or, pass it to a key employee. Transitioning the business smoothly without driving it into bankruptcy takes careful planning.
According to Barusch, ‘There are a number of tax and legal devices, but what people don’t spend enough time thinking about is how you do justice in the family and still manage the business.” If you have several children, but only one expresses interest in running the business (or is savvy enough to do it well), how do you treat the other siblings fairly? It can be a difficult problem to solve, but Barusch has seen many different approaches work.
If you don’t plan to pass the business to children, you typically look at selling it (finding ways to defer tax on the sale), enticing a larger company to take it over and give you stock instead of cash (avoiding the immediate tax burden) or taking it public. “Bringing in a trusted employee through an employee stock ownership plan is another option, but it can be complicated and burdensome for the people taking over,” says Barusch.
If two or more partners own the company, then a buy-sell agreement is a must. Each partner holds life insurance on the other for the value of that partner’s portion of the business. If one partner dies, the other partner uses the insurance payoff to buy out the surviving spouse or heirs. This prevents unwanted family members from meddling in the business, provides for the surviving family members and keeps the company operating.
Play 45: Investing Wisely
As your business matures, your retirement plans are implemented, tax savings are under way, risks are minimized and legal issues are squared up, you may find that you have some excess funds at your disposal. The best thing to do with that excess money is to put it to work. But how do you choose the right investment vehicles?
Rely on your plan and on a professional willing to review that plan and work toward its goals. “The broker who withstands the test of time is not the stock-picker or stock-timer,” says Erickson, “but a financial professional who will take a long-term approach and use portfolio allocation techniques. Look for someone who will take the time to find out your goals and call your accountant. If you call a broker and he just says to buy a certain stock, hang up. How does he know how that stock fits into your overall plan?”
Kell agrees and recommends diversification across a broad range of investments. “Designing a diversified investment portfolio is part of the overall planning process. There’s been no perfect way to invest over the last several years, but diversification still holds to a more predictable return with less risk.”
The Victory Dance
Once your playbook is assembled, don’t assume it’s unchangeable. Review it and update it regularly with your advisors. “I always follow up and do regular reviews with my clients so we can take advantage of any opportunities on the horizon,” says Kell. With a skilled team, solid strategies and commitment, there’s a good chance that instead of dejectedly heading back to the locker room in the future, you’ll be dancing in the end zone.
RELATED ARTICLE: Your Team Players
The more experienced and proactive the players on your financial team are, and the more each understands your overall plan, the better the team will perform.
Certified Financial Planner: Often the quarterback of the team who develops and coordinates all of the aspects of your financial plan and the activities of the other teammates. If you’re a business owner, find a planner experienced in both business and personal issues, because the two are tightly intertwined.
Banker: Can help you with deposits, loans and investments. Depending on your income and available funds, you may qualify for customized banking service, such as Wells Fargo Private Client Services. Services may include portfolio management, stock brokerage, financial consulting, trusts, customized loans, and business issues such as financing leasing, and foreign exchange for international trade.
Attorney: Can look at both your business and your personal situations and help set up trusts wills, powers of attorney, and medical directives and make recommendations on saving taxes or business issues such as restructuring your business entity.
Accountant: May provide more than book keeping services. Can evaluate your business on a regular basis and recommend improvements in areas such as payables and receivables payroll and taxes.
Broker Helps you invest and grow your money.
Kelley J. P. Lindberg is a Kaysville-based freelance writer.
Kelley Lindberg spent 12 years in the software industry before starting her small business, Blue Raven Services, Inc., in Kaysville, where she is a freelance writer and consultant. Eventually, she hopes to move the Blue Raven Services headquarters to a sailboat in the Caribbean, but in the meantime, she enjoys spending her lunch hours watching deer eat her tomato plants in the backyard.
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